Shrinking Your Shrinkage Part 1: Internal Theft

Monday, November 3rd, 2014
Stephen O'Keefe

Stephen O’Keefe

It is not fun to talk about or even think about, but theft is a fact of life for all retailers. In fact, retail theft – either by customers, employees, or vendors – is a $4.8 billion problem each year in Canada, according to Stephen O’Keefe, VP of operations for the Retail Council of Canada. It can range from the five-dollar capo that gets pocketed by a customer to the $5,000 guitar that an employee rings in for their friend as a $500 guitar. Losses due to theft or fraud, also known as “shrinkage,” come in all shapes and sizes and there is no way to prevent 100 per cent of it. But there are measures retailers can take to greatly decrease its likelihood.

When is come to loss prevention, theft by employees can be an even greater concern for businesses than theft by customers. The figures vary, with internal theft estimates ranging from around 30 per cent to over half of all retail thefts depending on who you ask, but all loss prevention experts agree that it is a significant concern.

The experts also agree that the number one way to deal with internal theft isn’t a specific policy or procedure, but rather creating an environment of engagement within the store. Employee engagement, meaning the extent to which employees feel personally
invested in the wellbeing and performance of the store, is the single greatest determinant of whether they are likely to steal themselves or report someone else who is stealing. As external studies and internal company reports have demonstrated, where there is high levels of employee engagement, there is lower staff turnover, fewer workplace injuries because employees are more diligent on the job, and lower shrinkage.
“There is a lower level of internal theft because, quite frankly, people don’t steal from people they like,” says O’Keefe, who has spent 29 years working in retail loss prevention, including 15 years as VP of loss prevention and risk management with Walmart. “Get them onside as part of the solution and they won’t be a problem.”

Increasing employee engagement could be an entire article in itself, and doing so depends on an employer’s managerial style and the personalities of their employees. That said, it is advisable for employers to conduct employee engagement surveys, which
can be tied into employee reviews. These questions could include: Would you tell a friend that this is a good place to work? Do you feel that your performance has an impact on the store’s performance? Do you feel personally invested in how the store is performing?

“If you’ve have 10 people and your engagement is 70 per cent, you know 30 per cent, or three of your staff, may not be engaged, and so you try to identify them and bring them along. Give them things that will engage them, either talking to them differently
or training them,” says O’Keefe.

Dean Correia

Dean Correia

For Dean Correia – principal at Correia Security Resources with 22 years of loss prevention experience, including work with The Gap, Starbucks, Walmart, and others – internal loss prevention all starts with the job interview. “Hopefully on your application you have a question that states, ‘Have you ever been convicted of a criminal offense in the last seven years?’ Give somebody a ‘yes or no’ chance to check that off. If they check off ‘yes,’ then you have the right to delve into it. I also think you ask; ‘Have you been trained towards theft prevention in your previous jobs? What do you think is a just consequence of somebody who steals?’ I think you just put it right out there and you do background checks and reference checks over and above the ones they put on their application,” explains Correia. “If I am putting you down as a reference and you and I are good friends and I did something that I am embarrassed about at my previous employer, you’re probably going to cover for me. But if I called two or three other people at that company who you don’t list on your application, I may get a fuller picture.”

As well, Correia says employers should explain to employees how the store’s sales performance directly impacts them in the form of hours. This, he says, also goes hand in hand with employee engagement. “So if sales are not being properly recorded, there’s going to be fewer hours for everyone. It’s a team environment, which increases engagement, which in turn increases the likelihood of it being reported quickly if somebody is stealing on the job,” he says. “So if I see you stealing, for example, and I am not engaged, my experience tells me that I am going to ask you how to do it; teach me. If I am engaged and I get how your theft is impacting putting money in my pocket by giving me fewer hours, then I am more likely to report it.” Correia also points out that theft doesn’t just mean taking products or money, but also time. It is common for employees to cover for each other by clocking one
another in before they arrive or after they leave. Again, the best way to combat this is through a culture of employee engagement and
an understanding that one person’s theft means fewer hours (and less money) for others.

One of the most common and costly forms of employee theft is refund
fraud, which is processing a non-existent refund and taking the money. Both O’Keefe and Correia emphasize that point of sale (POS) systems are a treasure trove of useful information that could tip you off to refund fraud and other issues. “If you’re talking about an internal theft prevention program, you have to use analytics,” advises O’Keefe. “Basically, you have all this data that is available if somebody is a cashier. So you dig into the data with software to try to come up with algorithms [that determine] how business normally operates and you flag exceptions.” O’Keefe says that specific exceptions to flag may include transactions where the same product is refunded three or more times in a given week or flag the cashier who processes the most refunds. With these red flagged exceptions, the employer can dig deeper to see if there is an issue. To prevent refund fraud, a policy could be put in place that requires a manager to approve all refunds before they can be processed, or if the problem is less severe, the manager signs off on all refunds at the end of the day with a cashier present.

In general, Correia attests, all the various data that the POS system can provide should be scanned for inconsistencies. You look at sales trends, cash overs and shorts, voids, refunds, etc. and determine if there are any irregularities. If there are, you can look at which cashier was manning the register at the time of the transaction(s) and delve deeper into their numbers.

An extremely common cause of shrinkage in any retail operation is what O’Keefe terms “sweethearting.” This is when an employee discounts a product for a friend. He gives the example of a customer who rings a $4,500 Taylor guitar to his friend working the cash register. The cashier then rings in the Taylor guitar as a $500 Yamaha guitar. The on-looking manager simply sees that a customer brought a guitar to the register, paid for it, and left.

O’Keefe explains that sweethearting is very common, and possibly the most common type of employee theft, but it is detectable. “A lot of retailers do not use the means of looking at their inventory levels from a plus and a minus category; they only look at the minus and are only concerned about what’s gone and not about what’s actually there,” he says. “That transaction that I just told you about would tell me that I have one extra Yamaha guitar on the floor and one less Taylor; one less Taylor because, basically, it was stolen. But what you don’t see is that it was processed as a Yamaha guitar that is still in the store. So I actually have on my books overstock on my perpetual inventory. A lot of retailers look at that and say that it is as bad as shrinkage. Why do I have extra product on the floor? What they have to understand is that the root cause of the extra product is because you processed a sale for a Yamaha and it off-set what you thought was a theft of a Taylor.”

In part two of this article on external theft, we will see how engaged employees are also better at deterring external theft. As well, many of the best practices associated with external theft, such as proper use of security cameras, also deter internal theft. All loss prevention measures work hand-inhand as a holistic approach that should be adapted to the needs of the store. “I think you assume good intent and stay vigilant, but have your controls in place and then create an environment of engagement,” says Correia. “It’s time, it’s supplies, it’s information, it’s cash, it’s inventory; there is some theft happening at every store in the land to a certain degree. It is never going to be zero per cent, but it doesn’t have to be 10 per cent either. So create that engagement, be vigilant, have your controls in check, and check your numbers often.”

Michael Raine is the Assistant Editor of Canadian Music Trade.